Working Paper: NBER ID: w17701
Authors: William R. Kerr
Abstract: In cross-sectional studies, countries with greater income inequality typically exhibit less support for government-led redistribution and greater acceptance of wage inequality (e.g., United States versus Western Europe). If individual nations evolve along this pattern, a vicious cycle could form with reduced social concern amplifying primal increases in inequality due to forces like skill-biased technical change. Exploring movements around these long-term levels, however, this study finds mixed evidence regarding the vicious cycle hypothesis. On one hand, larger compensation differentials are accepted as inequality grows. This growth in differentials is of a smaller magnitude than the actual increase in inequality, but it is nonetheless positive and substantial in size. Weighing against this, growth in inequality is met with greater support for government-led redistribution to the poor. These patterns suggest that short-run inequality shocks can be reinforced in the labor market but do not result in weaker political preferences for redistribution.
Keywords: Income Inequality; Redistribution; Social Preferences; Compensation Differentials
JEL Codes: D31; D33; D61; D63; D64; D72; H23; H53; I38; J31; R11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income Inequality (D31) | Accepted Wage Differentials (J31) |
| Growth in Inequality (F62) | Support for Government-led Redistribution (H19) |
| Income Inequality (D31) | Social Attitudes for Redistribution (H23) |
| Growth in Inequality (F62) | Labor Market Disparities (J70) |
| Income Inequality (D31) | Political Preferences for Redistribution (H23) |